Great fun doing my first webinar on Responsible Investing with Eco-Canada last Wednesday, March 23, 2016.

It was a great opportunity to collaborate with Stephanie Hamilton of EEM Consulting on such an important topic. If you’re interested to learn about responsible investing, please feel free to listen to a recording here: ECO-Canada Responsible Investing Webinar

Happy to share with you the link to my first webinar. I will be joining Stephanie Hamilton of EEM Inc., as a special guest, for a discussion with members of Eco-Canada on responsible investing. We’ll walk through current trends, how money flows, the need for disclosure of sustainability related data and how this relates to your company.

Well, it’s been awhile and I have been quite hesitant to continue on this journey to blogging yet, there just seems to be so much happening that I feel that it should be shared. So, here I am back into my chair willing to share what’s happening in my life, but mostly with my passion regarding sustainable business and sustainable investing.

So, to take this first leap, I’d like to share with you below an article that I wrote and that was published in the Winter 2016 newsletter of the Pension Industry Association of Canada (PIAC):

“ESG Integration – Have we crossed the tipping point?”

Canadian journalist and bestselling author, Malcolm Gladwell, describes a tipping point as “the moment of critical mass, the threshold or the boiling point”. Have we crossed into the tipping point with regards to the integration of environmental, social and governance (ESG) factors into traditional investment management?

2015 has certainly been a year of headlines regarding these topics with well-known names like Mark Carney signaling that climate change is a risk that needs to be managed. Companies like Barrick, Yamana Gold and CIBC, receiving “no’s” on their Say on Pay advisory votes and shareholders voicing their dissatisfaction by withholding support for a number of directors. The Canadian Coalition of Good Governance (CCGG) actively began to push for proxy access. A new leader in Canada’s federal government. Increased provincial collaboration on carbon pricing. And finally, the year will end with the hosting of the UN Climate Change conference in Paris.

In June 2015, the CFA Institute published the results of its first ESG survey and it found that 73% of respondents take ESG into account in their investment analysis and decision-making process. The main motivations being to help manage investment risks, growing investor demand, and that it’s one fiduciary duty.

On the corporate side, the Global Reporting Initiative (GRI) says that it has seen a 24% annual growth, over the past 6 years, in the number of voluntarily published corporate sustainability reports using their framework.

Over the last five years, we’ve seen close to 50 non-financial initiatives, frameworks, standards and rankings come to fruition, many intended for a variety of different audiences. In fact, according to the Global Initiative for Sustainability Ratings (GISR), there are at least 80 firms that offer more than 350 rating products related to corporate sustainability.

Of these initiatives, some focus directly on investors. In 2006, the UN Principles of Responsible Investing (UNPRI) was launch and last year alone, it saw a 15% growth in signatories, currently sitting at 1425 and now represents over $60 Trillion in assets under management.

The CDP, which requests standardized climate change, water and forest information from the world’s largest listed companies, has also seen a 15% annual growth in companies responding to its annual survey. It now has over 5000 companies reporting and represents 822 investors with approximately $95 trillion in assets.

Since 2011, the Sustainable Accounting Standards Board (SASB) has been creating and disseminating accounting standards that reporting issuers can use to disclose material sustainability factors in their fillings with the Securities and Exchange Commission. They have developed standards for more than 80 industries in 10 sectors and on average each have about 14 key material indicators. They plan to release provisional standards for all remaining sectors and industries by 2016. We’ve also seen the development of the International Integrated Reporting Council (IIRC), which has put forth a framework for integrated reporting.

As we seek better transparency around these issues, the amount of information to digest grows. Investors often feel dissatisfied with how risks and opportunities are being quantified in financial terms, and there tends to be little comparability, even with companies in the same sector. It can be very challenging to sift through this information to find what’s most material to one’s potential investment universe.

So as investors, where can you get relevant ESG information? The brokers, right? In Canada we haven’t seen our mainstream brokerage community embrace the integration of ESG factors into their research products. We are, however, seeing global players like Goldman Sachs, Bank of America Merrill Lynch and Citibank, to name a few, producing great thematic research. Over the past 5 years we’ve also seen significant consolidation of the pure ESG research providers, with some of the most recognized names in North America being Sustainalytics and MSCI.

In addition to the traditional brokers, another service provider is leading the way.Bloomberg, which provides financial data to the investment community, now also collects ESG data from published corporate public information. They’ve seen extraordinary growth in ESG data downloads with a 76% increase year over year, with more than 17,000 users globally.

Many of the initiatives to date have been voluntary. But there’s a growing voice for mandatory reporting. The Sustainable Stock Exchanges (SSE) launched their “Model Guidance on Reporting ESG Information to Investors” which is meant to assist stock exchanges to provide written guidance on reporting ESG information by their issuers, by the end of 2016. This was followed by The World Federation of Stock Exchanges, which has launched its first round of recommendations of material ESG metrics for exchanges and provided similar guidance for issuers.

But what about shifting regulations directly related to pension funds? Nationally, the Ontario Pension Benefits Act comes into effect as of January 1, 2016. Plan administrators must include information about whether ESG factors are incorporated into their Statement of Investment Policies and Procedures (SIPPs) and, if so, how they are addressed in the plan’s investment strategy.

The US market also shifted this year. In October, we saw revised guidance from the US Department of Labor, which now means that fiduciaries cannot accept lower expected returns or greater risks, but that they may take ESG benefits into account as “tiebreakers” when investments are otherwise equal. This meaningful change is expected to advance the rate of adoption of ESG in the USA.

The changes in North America are in addition to the regulatory frameworks that have been in existence since 1999 in the UK, where pension funds are required to disclose the extent, if at all, to which ESG considerations are taken into account in the selection, retention and realization of investments.

France also requires listed companies to incorporate information on ESG categories into the annual management report, be approved by the board and verified by a third party. In addition, mutual funds have to mention in their annual reports how ESG objectives have been taken into account in their investment policies. In 2015, France also passed the Energy Transition Law, which will require listed companies to disclose financial risks of climate change and measures that have been adopted to reduce those risks. This has also been extended to banks and credit providers and institutional investors.

Both corporations and investors are also feeling growing societal pressures. As investors look to assess all of the potential risks as they embrace ESG integration, non-governmental organizations (NGO’s) are often great sources of information and perspective. This type of relationship is new for most investors.

Yet, pension funds are also becoming the target of NGO campaigns, in particular around divestment of fossil fuels. This year we’ve seen the UK Fossil Fuel campaign which released the fossil fuel holdings of local pension funds with a view to putting pressure on them to divest from coal and oil and gas holdings. There’s also the Asset Owner Disclosure Project which has released it’s 3rd annual index of the top 500 global asset owners, and found that nearly half appear to be limited in their consideration of climate change in their portfolios. Locally, we’ve also seen the launch of the “Decarbonizer” by Corporate Knights. It is a tool that can allow the public to assess what returns might have been, if the funds had divested of its holding to fossil fuel companies or investing in “green” companies. For many pension funds, the possible reputational damage could be significant should they be targeted by some of these organizations, or other social networks that use these tools.

All of these frameworks, initiatives and regulatory changes lead us to the point of greatest importance for most investors — materiality. When looking at the integration of ESG factors into one’s investment process, what one is really looking for are the key, material issues that may impact their investment decisions.

In March of 2015, the Harvard Business School published the “First Evidence of Materiality”, which highlighted that firms with good performance on material issues and concurrently poor performance on immaterial issues, perform the best over time. The results of this work speak to the efficiency of a firms’ investment in ESG-related issues. As investors, you want to be able to assess these material issues early and ensure that management teams are investing and managing these issues well.

In general it’s been a difficult process for companies to articulate the financial impact of the E and S-related issues. It has been even more difficult to define the value-enhancing initiatives that are feeding into long-term corporate strategy of these organizations. All of these strategic efforts also need to be balanced with some of the broader ESG issues like carbon emissions and climate change.

Let’s take one of the leaders in this space. Four years ago, Unilever, launched its Sustainable Living Plan. They are now able to communicate that many of these brands, are achieving high single and double-digit sales growth. Their CEO notes “these brands accounted for half of the company’s growth in 2014 and grew at twice the rate of the rest of the business.”[i]Most recently however, the CEO has also highlighted that Unilever estimates that the greenhouse gas impact from people using its products has actually increased by about 4 percent since 2010 and that their water use has gone down just 2 percent. They are also being criticized for poor conditions in tea estates in Keyna, and in India, the company is being accused of failing to clean up a contaminated factory.

Another interesting example is Target. It too has expanded its selection of sustainability products and launched the “Made to Matter” line. One year into it’s program, “sales of these products grew twice as fast at Target as they did elsewhere in the marketplace – these brands seeing a 25% overall spike in sales since the launch of the program. The “Made to Matter” products at Target are projected to bring in $1B in sales in 2015”[ii]. As much as this looks like a great opportunity, it needs to be weighed against risks as well. Target was also subject to security breaches last year and their reaction, compared to Home Depot and JP Morgan, seem to suggest some elements of negligence. Both Unilever and Target are great examples of how risks and opportunities need to be weighed in the investment analysis process.

What both of these examples show, is that the judgment of the investment manager is critical. Given the proliferation of information, limited research product, resources, and talent, how can investment managers determine what is material and what can have financial impacts? As pension funds, are those managing your funds proactively managing these risks and opportunities?

As we come to the close of 2015, we’ve seen some pretty high profile companies, like Volkswagen and BHP Billiton, face situations that continue to put ESG issues on the front page. Ultimately, it appears that the ship has sailed on this market theme, and although we have no idea how rough the seas will be, it appears it’s time to set your own course.

Here’s a reprint of the article in “Listed Magazine” for which I was recently interviewed by Susan Mohammad.

Few technologies have transformed an industry or become an economic game changer the way advancements in the hydraulic fracturing process, or “fracking” has.

In under a decade, fracking has made vast reserves of natural gas and oil previously uneconomical to access viable—turning the calculus of what’s possible for the industry entirely on its head. The impact has been most dramatic south of the border, where the U.S.—which for decades has fretted about being held hostage to OPEC and foreign energy—is projected to become the world’s biggest oil producer around 2020 and to achieve energy self-sufficiency by 2030. An immediate economic upside: more jobs. North Dakota, for example, has the country’s lowest state unemployment rate, due in large part to fracking-aided shale “tight” oil production in its underlying Bakken formation. To the east, future development of the Marcellus Shale Region—which holds a ridiculously huge 410 trillion cubic feet of gas (more than half the country’s total)—could give Pennsylvania a US$42.4 billion boost annually by 2035 (up from $7.1 billion in 2010), according to financial analytics firm IHS Global Insight.

In Canada, the advent of fracking—which involves high-pressure injecting of water and other chemicals deep into rock, breaking it open to permit feasible extraction of embedded gas and oil—has increased estimated potential gas reserves by a factor of three, four or more. In B.C., 7,300 wells have been fracked since 2005. However, it’s not all great news. Instead of pushing up production, the fracking-induced abundance contributed to a glut that sank prices. Demand from the U.S. has also declined, not surprisingly, resulting in a 16% decline in gas exports to the U.S. over the past five years, according to the National Energy Board. Unconventional gas production continues to increase as a percentage of the total, but overall production is pretty flat. Production of tight oil, on the other hand, is surging—but the totals are small. According to a National Energy Board briefing note, between 2006 and 2011, tight oil production grew to more than 170,000 barrels a day from less than 10,000.

But as miraculous as fracking technology is for the industry at large and for the economies of energy-rich regions, today it’s also seen as a risky salvation. Supply gluts and depressed prices are an immediate, bottom-line consequence. But among the broader public and other stakeholders, concerns over potential ground water contamination from methane and/or the myriad chemical ingredients in fracking solutions top the list. Gross water consumption is also a problem. Every single well that’s fracked uses millions of litres of water in the process; a 2011 U.S. Environmental Protection Agency report estimated that between 70 and 140 billion gallons of water are now used annually to fracture wells in that country. Fracking has also been known to cause earthquakes, air and water pollution, and contribute significantly to greenhouse gas emissions.

Even the word fracking itself is divisive. It contains enough power to assemble activists fearing environmental catastrophe, and to spur a wild-west development mentality as jurisdictions scramble to make approvals and get projects running before increased regulations and public opposition makes it more difficult, more expensive or impossible. It’s hard not to think of the scale and reach of similar opposition to the oilsands and the Keystone XL pipeline, and wonder if fracking is next to be tested in the same way?

It’s not that things aren’t already on the boil. Fracking disputes have piled up a lengthy history in the courts. And a number of states and provinces have introduced moratoriums or put restrictions on its use pending further research into all the potential health and environmental consequences. In January, Quebec’s Parti Québecois government was the latest. It said it was banning all fracking pending a review and introduc- tion of new governing legislation (this followed a partial moratorium installed by the previous Liberal government in 2011). At the other end of the spectrum, other states have lifted earlier restrictions and some haven’t and won’t go near them at all.

In terms of future regulation and legislation, both Washington and Ottawa are expected to announce the results of extensive reviews and new guidelines in 2014. No doubt, many companies involved at all stages of the energy production process will be watching and waiting (and trying to lobby) to see what those rules convey. Higher costs, market restrictions, increased exposure to potential liability—any and all of these can have serious consequences for share prices and valuations.

“Access is the biggest hurdle oil and gas companies must face in retrieving shale products,” says Milla Craig, owner of Millani Perspectives, a Montreal-based sustainable development consultancy. “You may have the best resource out there but if you can’t get access to it because the public doesn’t want you there, or because the public has influenced governments and regulators to impose barriers to access it, then that’s a major risk for an investor.”

At the same time, it’s often social media, documentaries and movie reenactments that get the people riled up. In that context, what does it say about fracking’s potential to grow as an issue that it’s spawned at least one celebrated indie doc, “Gasland,” and then just made it to Hollywood in the Matt Damon film, “Promised Land?”

Make no mistake, fracking still isn’t driving a lot of institutional activism. In 2012, in the U.S., 10 shareholder resolutions were put to companies on fracking.“I think it’s a percolating issue,” says Glenn Keeling, director of Phoenix CST Advisors in Toronto, a leading proxy adviser.

For the most part, Keeling says, fracking still fits under a bigger subset of potential exposures and environmental risks. But that doesn’t mean it isn’t noticed. As Craig notes, as soon as analysts went back to the drawing board to look for other ways to identify risk after the 2008 financial crisis, weighing environmental, social and governance (ESG) factors for company valuation purposes and to identify potential investment risk became mainstream. “Two or three years ago Bloomberg started to embrace ESG data by adding it to their terminals,”she says. “They rolled the dice on it and now it’s their biggest growth sector.”

Craig also makes the important point that shareholder activism is a bit like an iceberg. There’s the noisy, public stuff above the surface that you hear about. But down below, or behind the scenes, managers of very substantial “ethical” funds and other large pension fund managers are putting quiet pressure on companies to integrate better ESG practices. There’s no doubt fracking comes up. “They will go directly to management teams. Their goal is ultimately to get the best performance for you and I as pensioners and they don’t need to make those activities public,” says Craig.

When it comes to finding ways forward that work for industry, affected communities and the environment alike, there are nearly as many questions and debates in academic, political and activist circles as there are potential fracking sites (and little consensus in sight). In the U.S. for example, some wonder who should regulate the chemically laden fracking wastewater? Should it be the Environmental Protection Agency or state-run transportation departments since the water is transported both within and across state lines?

In Pennsylvania, the Department of Environmental Protection recently announced a plan for a year-long study of radioactive waste from fracking. In New York State, where activist activity on both sides of the debate is growing, a moratorium on shale gas exploration expires at the end of February. During a recent protest in the city of Albany, legendary folk singer Pete Seeger showed up to lead the crowd in a rendition of “This Land is Your Land.” As the moratorium expiration drew near, environmental groups also hinted at the possibility of launching lawsuits if exploration is approved. Challenges in court could prevent companies from operating for years.

In Quebec, American firm Lone Pine Resources Inc. (TSX:LPR), which is incorporated in Delaware but headquartered in Calgary, filed notice last November that it intended to sue the federal government for more than $250 million over the previous provincial Liberal govern- ment’s moratorium. The company has said the move to halt natural gas exploration permits beneath the St. Lawrence River was illegal under provisions of NAFTA.

“It seems that we’ve either gone from a regulated-but-full-speed-ahead approach or the other end of the spectrum, which is it’s not going to happen at all,” says Matt Horne, director of the climate change program at the Pembina Institute in Calgary.

Horne says the level of alarm and activity against shale exploration varies from region to region, depending on a few factors including differences in geology. For example, where water basins are closer to the surface (as they are in Quebec or Eastern Canada when compared to aquifer depths in B.C.) concerns over contamination risks seem elevated. The presence of a few bad actors and incidents, which there has been in Pennsylvania, also “raises a bunch of alarm bells on the environmental implications,” says Horne.

The industry isn’t standing still. It’s primary association, the Canadian Association of Petroleum Producers (CAPP), publishes best-practice fracking guidelines that it expects all of its members to follow. Pembina’s Horne says it would be better if those guidelines were enforceable.

Horne also says companies should be more transparent about reporting which chemicals they use in fracking fluid (some companies have argued that this information is proprietary) regardless of whether they are operating in a jurisdiction that mandates they do so or not. FracFocus.org and FracFocus.ca are examples of U.S. and Canadian chemical disclosure sites where companies can do just that. In B.C., the British Columbia Oil and Gas Commission has forced companies to disclose the chemicals used in fracking fluid 30 days after the completion of a job. The information is then made public on FracFocus.ca (where over 450 companies are listed as participants.)

Due to environmental risk factors, Horne expects regulations to tighten in many jurisdictions, which will translate into higher operating costs for an industry already worried about a sharp decrease in exports.

Another voice joined the alarmist chorus in early February, when federal Environment Commissioner Scott Vaughan singled out risks from chemicals used in fracking in his last report as auditor of Canadian environmental regulations.Vaughan said he was worried about gaps in the government’s knowledge about all the chemicals used in the process— not only because they might be hazardous and dangerous, but because the government says as long as its information is spotty, “it cannot determine whether risk assessments and control measures are warranted.”

There continues to be questions as to the speed of uptake of ESG (Environmental, Social and Governance) factors into the mainstream investment process. Earlier this month, Ian Aylward of Aviva Investors wrote an article in FTAdvisors that outlines details of a survey they recently conducted with fund managers.

The following are some excepts from the article:

According to 31 global fund management houses with combined assets under management of roughly £4trn, the majority considers ESG to be relevant to their broader business.

68% of respondents believed there to be a link between ESG performance and total returns.

43 % have a dedicated ESG/SRI resource and 55 per cent subscribe to an ESG information provider.

84% of respondents also stated that managers and analysts consider ESG factors as part of their processes. Generally the governance part of ESG tends to receive the most attention and it is not surprising to note that the same number of respondents vote actively and have a voting policy in place.

90% of respondents believed that ESG issues are important for clients. It does not seem like a huge leap to assume that if this is representative of the feedback asset managers are getting from their clients we are likely to see ESG factors playing a larger role in the mainstream going forward.

74% of respondents expect ESG factors to be incorporated in all mainstream funds in the future.

The results of the survey are telling, although for those of us in North America, we need to remember that Europe is leading the way … but the trend remains the same. If anything, I believe that surveys of this kind should be a wake-up call for fund managers here in Canada. The competition is moving. The question is, are you?

First and foremost, I am pleasantly surprised to see Forbes including a discussion on CSR in it’s online forum. Secondly, I was equally surprised to read this headline and wanted to shout “Finally!”.

The author of the article notes that “I no longer believe that CSR is the best way to capture the relationship between business and society or an effective approach for addressing complex social issues”. The author then goes on to determine that “it occurred to me that social changes isn’t the responsablity of business, it is the result of business.” Again, “Finally”.

The author goes on to provide a four-part framework for business and society. I’ll share the hightlighs here:

In order to have social results, we need to acknowledge that every business, in every sector, of every size has a social purpose. Businesses need to have the courage to declare their commitment to social change, the conviction to participate in building systemic solutions to social issues, and governance policies that support those priorities. A corporations’s social purpose should be crystal clear and included in internal and external communications wherever possible.

Social results have to be built into the metrics of every operational aspect of business. They must be accountable for ensuring that their suppliers have fair hiring policies and safe working conditions and that environmental impacts are reduced where-ever possible.

Business depends on people making or doing things that other people believe are valuable enough to be worth paying for. Corporations should be capturing these outcomes in their annual review of business and social performance related to their employees and customers.

Corporate philanthrophy is still important, and partnerships are more important than ever. Partnerships that involve an equal exchange of ideas and allocation of resources towards shared business and social objectives are seen by participants as being essential ingreditions of social change. Corporations need to recognize how important these partnerships are, allocate more resources to building better relationships with civil society and measure the results of these key joint efforts.

Finally, the author concludes with:

we need to recognize that CSR is neither an adequate way to describe the relationship between business and society….I don’t have a new name for CSR, but I am convinced that our understanding of what business represents is far too narrow. Business isn’t just about making money and it isn’t inherently irresponsible. The business of business has the potential to make long-term, systemic social change a reality.

All in all, I can understand the conclusion that the author has come to. Business is here to stay and business can and does have major impacts on society. The question is whether society is ready and willing to work with business to seek change. There are numerous examples of global corporations getting involved in partnerships as outlined above. Are they easy? Absolutely not. Does anyone organization have the right recipe? Time will tell. What we do see, however, is a new business model coming to fruition and what it’s producing is a more competitive landscape. It’s time for business to sit up and notice.

So there’s been lots of talk in the past few days about the implications of the UNPRI’s delay of the new reporting framework for it’s signatories. They’ve been working on this new framework since 2011 and it was due to be launched for the 2013 reporting season. It now looks like it will now be delayed until 2014 — for the sceptics, that’s a 3-year time period without reporting accountability.

So what does all of this mean? Should we be reading something more into this move? According to Responsible Investor “signatories have raised issues about data security, client confidentiality and the complexity of the reporting process, despite the PRI’s attempts to lighten the burden in recent years. But much resistance appears to have coallesced around whether the reporting process implies that there is a right way to do responsible investing.”

All of this causes me to ask some questions:

How can the PRI actively pursue disclosure and transparency through engagement with publicly-listed companies if their own signatories are not willing to do the same?

Doesn’t one need to walk the talk to be credible?

With more than 1100 signatories are we at the critical mass where we no longer truly need the reporting?

Have we already hit the tipping point and therefore, does it really matter?

Does this ultimately slow down the amount of pressure on public companies with regards to disclosure and transparency?

Only time will tell but one thing is for sure, this is a clear signal to watch. They’ve succeeded in putting through mandatory fees (which no one expected to hold), so perhaps its best to take a wait and see approch! Let’s see if signatories continue to grow. Perhaps the choices that the PRI is making now to delay is, in fact, best for the longer-term success of it’s goals.

In the end, I’ve always said I feel that the true opportunity in this movement towards responsible/sustainable investing is to mainstream the integration of ESG factors into traditional investing. As always, the success of any fund is based upon the manager and their particular style. With such, doesn’t it then seem normal then that the reporting process needs to reflect individual style too?